FHA mortgages can hurt low-risk borrowers, critics say

New York /
Dec.December 06, 2013 11:15 AM
 

Mortgages insured by the Federal Housing Administration are often the only port of call for borrowers who can’t afford a hefty down payment, but critics say that the FHA mortgages come with high premiums that exploit these borrowers.

If the economy were to slide back into a recession, said Edward Pinto, a fellow of the American Enterprise Institute, the majority of FHA loans would be at high risk of default. And since the FHA prices all the loans equally, borrowers have no barometer to gauge the relative riskiness of their loans.

In fact, Pinto told the New York Times, the low-risk borrowers would probably be better off getting a loan from the private sector, as the FHA is effectively overcharging them to subsidize the higher-risk borrowers. “They may assume that the government is protecting their interests,” Pinto said.

FHA-backed loans offer first-time buyers a down payment of as little as 3.5 percent, compared to a minimum of 5 percent for loans backed by Fannie Mae, according to the Times. But the premiums on FHA loans are considerably higher, the newspaper said.

Borrowers would be well-served if the FHA shifted to risk-based pricing, suggested Michael Lea of the Corky McMillin Center for Real Estate at San Diego State University. And the FHA should inform borrowers of the difference in insurance costs for FHA and Fannie Mae loans, Lea told the Times. [NYT]  – Hiten Samtani


Related Articles

arrow_forward_ios
Hispanics account for more than half of U.S. homeownership growth in the past decade despite making up only 18 percent of the population. (iStock)
Buenas noticias: Hispanic homeownership soars
Buenas noticias: Hispanic homeownership soars
Refinances made up 60 percent of all applications, up slightly from 59.2 percent the previous week. (iStock)
Mortgage rates dip, triggering surge in loan requests
Mortgage rates dip, triggering surge in loan requests
Freddie Mac’s economists said the slowdown will be caused by a hike in mortgage rates and limits on housing supply. (iStock)
Fannie, Freddie say housing market could see slight hiccup
Fannie, Freddie say housing market could see slight hiccup
Mortgage requests, refinancings continue to drop
Mortgage requests, refinancings continue to drop
Mortgage requests, refinancings continue to drop
1440 Broadway and One Park Avenue (Google Maps, Vornado)
These were the largest Manhattan real estate loans in March
These were the largest Manhattan real estate loans in March
Better CEO Vishal Garg and SoftBank CEO Masayoshi Son (Better.com, Getty)
Better.com lands $500M investment from SoftBank
Better.com lands $500M investment from SoftBank
An index tracking applications for mortgages to purchase homes decreased 5 percent. (iStock)
Frenzy ending? Mortgage requests fall 5%
Frenzy ending? Mortgage requests fall 5%
(iStock/Illustration by Kevin Rebong for The Real Deal)
March madness: Homes sold faster than ever last month
March madness: Homes sold faster than ever last month
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...